Thursday, October 20, 2016

Portland's Economic Outlook Changed as Economy Reaches Full Employment

by Josh Lehner, Economist, State of Oregon Office of Economic Analysis

The Portland metropolitan area’s job growth and wage gains continue to outpace the typical metro across the nation. Such gains are also on par with growth seen during the height of the housing boom last decade. Importantly, the expansion has now reached the lowest income households and broader measures of well-being like the poverty rate. However, the outlook for an economy approaching full employment differs in important respects from one that is digging out from a recession. The tighter labor market brings good news for workers in the form of rising wages, different challenges for businesses looking to expand and shifts the calculus for households looking to buy or rent.

First the good news. Economic growth in recent years is finally impacting broader measures of economic well-being. Median household income in the Portland region increased six percent in 2015, the largest gain in a decade. However, after taking inflation into account, local incomes remain about one percent below their pre-Great Recession levels. That said, median household income in the typical large metro nationwide remains six percent below pre-Great Recession levels.

Even as the lowest income households have suffered the largest declines in the past decade, the recovery is finally starting to reach them. Nationally and across Oregon, such households saw the largest income gains last year, at least in percentage terms. This welcome news resulted in a correspondingly large decline in the poverty rate. These improvements are seen in the Portland region among households in deep poverty, those with incomes less than half the official poverty level. Furthermore, poverty in Portland has improved proportionately for both whites and people of color alike.

The driving force behind these improvements is the strong labor market. Employment in the Portland region is not only considerably higher than back in 2008, but it has fully caught back up with population growth over the same period. The labor market is getting tight. As the pool of available workers shrinks, businesses must compete more on price to attract and retain the best employees. This is great news for workers as wages rise. Given that wages make up the majority of income for households at the bottom, such wage gains are pulling workers and families out of poverty today. Higher-income households have a wider variety of income sources besides wages, such as capital gains, dividends and the like.

The tight labor market does mean businesses looking to expand must cast a wider net to find workers. This includes potential hires that may not have been looking in the first place. Examples include stay-at-home parents, early retirees or discouraged workers who have previously given up looking. With the right opportunity, such workers move directly into employment, bypassing the job search phase entirely. Additionally, businesses can no longer be as picky in hiring the perfect candidate. Firms must take chances on workers without the ideal experience or a potentially incomplete skill set. On-the-job training becomes considerably more important.

The outlook for an economy at full employment differs in that net growth rates are expected to slow, but for a good reason. Statewide, job gains in recent years are more than twice as much needed to keep pace with the growing population. This is welcome news during a recovery and the large gains eat up the economic slack. However, such gains are not sustainable over the long-term; they are peak growth rates. As the economy approaches and reaches full employment, job growth is expected to slow to a sustainable rate, more in line with the working-age population.

Finally, the combination of a strong regional economy and the Millennials beginning to age into their mid- and late-20s, does mean the Portland metro is at peak renter. Homeownership across the region increased in 2015 with the largest gains among the 20- and 30-something households. While expectations are not for a return to mid-2000s ownership rates, the large shift into rentals over the past decade is likely finished. That said, in a growing metropolitan area like Portland, the overall number of renters and owners will both increase. The challenge is ensuring the housing supply keeps pace with demand. This has not happened in recent years and affordability has eroded.

Josh Lehner is a Senior Economist with the State of Oregon’s Office of Economic Analysis. He develops the quarterly Oregon Economic forecast, including outlooks for employment, income and housing. Additional responsibilities include the Oregon Index of Leading Indicators, tracking international developments in Oregon’s export markets and forecasting revenues for the Oregon Lottery, Oregon Judicial Department and state tobacco taxes. Mr. Lehner earned a B.A. in Economics from the University of Colorado and an M.S. in Economics from Portland State University.

Read more updates on the Office of Economic Analysis blog.

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